Option and Blades

1. If Blades uses call options to hedge its yen payables, should it use the call option with the exercise price of $0.00756 or the call option with the exercise price of $0.00792? Describe the tradeoff.

2. Should Blades allow its yen position to be unhedged? Describe the tradeoff.

Chap 6

1. Did the intervention effort by the Thai government constitute direct or indirect intervention? Explain.

2. Did the intervention by the Thai government constitute sterilized or nonsterilized intervention? What is the difference between the two types of intervention? Which type do you think would be more effective in increasing the value of the baht? Why? (Hint: Think about the effect of nonsterilized intervention on U.S. interest rates.)

Chap 8

1. What is the relationship between the exchange rates and relative inflation levels of the two countries? How will this relationship affect Blades’ Thai revenue and costs given that the baht is freely floating? What is the net effect of this relationship on Blades?

2. If Blades does not enter into the agreement with the British firm and continues to export to Thailand and import from Thailand and Japan, do you think the increased correlations between the Japanese yen and the Thai baht will increase or decrease Blades’ transaction exposure?

3. Do you think Blades should import components from Japan to reduce its net transaction exposure in the long run? Why or why not?

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2. What are some of the disadvantages Blades could face as a result of foreign trade in the short run? In the long run?
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...Abstract
Blades, Incorporated has been exporting to Thailand since its decision to supplement its declining U.S. sales. This decision seems ideal due to the Southeast Asia fast growing economies. With this in mind, this paper will analyze the Blades, Inc. case in Chapter 5 of the textbook by discussing the feasibility for Ben Holt, the chief financial officer, to move forward to hedging Blades’ yen payables position, the advantages and disadvantages associated with purchasing derivatives instruments such as call options and future contracts, the use of the market consensus of the future yen spot rate provided to determine the optimal hedge for the firm and the danger and/or value of using derivatives as a risk management tool (Madura, 2009).
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As Dr. Cogley said in class the other day, sometimes futures contracts and options are
hard to wrap your head around until you see them a few times. So I’ve written up some
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how we get the results that we do. But before we jump into that, we need to revisit our
terms.
1. Forward contract: A buyer and a seller agree to a specific price/quantity exchange
sometime in the future. Forward contracts are done between individuals (no
intermediary), so all financial risk is born by those in the contract, which may
result in some sort of risk premium factor being included.
2. Futures contract: Similar to forward contracts, but sold via exchange markets
which act as intermediaries. By charging small transaction costs, the
intermediaries cover possible default by either party, meaning those in the
transaction no longer have to concern themselves with default risk.
3. Options contract: Similar to futures contracts, but without the binding effect – you
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have to if you decide you don’t want to.
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...related to the price of a European call option on a stock?
c. The volatility
5. When we talked about Vega hedging, if a portfolio has 1000 shares of SPY and 10 contracts of at-the-money December 2013 put option on SPY (and nothing else in the portfolio), is the portfolio vega neutral?
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6. Which of the following is not true?
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a. Futures contracts nearly always last longer than forward contracts
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9. Which of the following is true?
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